Payment Guidelines for Virtual Digital Assets

The Income Tax Act of 1961 was amended by the Finance Act of 2022 to include Section 194S, which would go into effect on July 1, 2022. This section deals with the provisions of TDS on transfer of Virtual Digital Assets.

If payment is made to any resident such person is responsible to deduct TDS @1% of the consideration for the transfer of Virtual Digital Asset.

This deduction does not need to be made if:

• The payment is payable by a specific person and its value, or the sum of its values, does not exceed 50,000 rupees throughout the fiscal year;
• The consideration is payable by any person other than a specific person, and the amount, or aggregate value, of such consideration, does not exceed 10,000 rupees for the financial year.

The following individuals are regarded as specified persons for the purposes of this clause:

• A person or Hindu undivided family (HUF) that does not get any income under the category “profit and gains of business or profession”; and
• A person or HUF with income falling under the category of “profits and gains of business or profession,” whose total sales, gross receipts, or turnover from the business they operate does not exceed one crore rupees, or whose turnover from the profession they practice does not exceed fifty lakh rupees. This benchmark must be met in the fiscal year that comes before the one in which the VDA is moved.

The Central Board of Direct Taxes (CBDT) is permitted to establish guidelines with the permission of the Central Government under subsection (6) of section 194S of the Act in order to remove barriers. These regulations must be presented to every House of Parliament and are obligatory on the income-tax authorities as well as the person who is in charge of paying the consideration for the transfer of Virtual Digital Assets

Accordingly, the CBDT hereby issues the following directives in accordance with the authority granted by subsection (6) of section 194S of the Act. These rules will only be applicable when a VDA transfer is made on or through an exchange. In other situations (such as peer-to-peer and other conditions), the Act’s requirements of section 194S shall apply, and with respect to these recommendations, only the explanations provided in Question 6 shall be subject.

Guidelines

Q1. When a VDA is transferred on or via an exchange and money is paid by the buyer to the exchange (directly or through a broker), then the money is sent from the exchange to the seller either directly or indirectly through a broker, who is responsible for deducting tax from that payment?

Ans. Any person who is liable for providing to any resident any amount as payment for the transfer of Virtual Digital Assets must withhold tax under section 194S of the Act. As a result, section 194S of the Act requires the buyer (i.e., the person providing the consideration) to withhold tax in a peer-to-peer transaction (i.e., a direct buyer-to-seller transaction).

However, there may be numerous tax deduction requirements under section 194S of the Act if the transaction is occurring on or via an exchange. Thus, the following clarifications are made in order to remove obstacles to transactions occurring on or via an exchange:

(a) In the event that a transfer of VDA occurs on or via an exchange and the VDA in question is owned by a different party than the exchange, the buyer would then be crediting or paying the exchange in this instance (directly or through a broker). The owner of the VDA that is being transferred must then be credited or paid by the exchange, either directly or through a broker. Due to the presence of numerous participants, it is made clear that:

1. According to Section 194S of the Act, only the exchange that is crediting or paying the seller may deduct tax (owner of the VDA being transferred).
2. When a broker owns the VDA, the broker is the one who sells. As a result, under section 194S of the Act, the exchange may deduct the amount of consideration it credits or pays to the broker. When the credit or payment is made between the exchange and the seller via a broker (and the broker is not the seller), both the exchange and the broker are responsible for withholding taxes in accordance with section 194S of the Act. However, under section 194S of the Act, the broker alone may deduct the tax provided the exchange and the broker have a written agreement indicating the broker would be deducting tax on such credit or payment. The exchange would have to submit a quarterly report (in Form No. 26QF) for all such transactions made during the quarter on or before the due date specified in the Income-tax Rules, 1962.
3. When a VDA is exchanged on or through an exchange and the exchange owns the VDA that is being transferred, there are just one or two participants involved. Section 194S of the Act requires the buyer to deduct tax. The buyer might not be aware that the VDA being transferred is owned by the exchange, which could pose a practical problem. As a result, the buyer may have legitimate concerns about its need to withhold tax under section 194S of the Act. This problem would still exist if the buyer purchased VDA from an exchange via a broker.

To resolve this issue, it is made clear that while the buyer or his broker will still be primarily responsible for withholding tax under section 194S of the Act in this situation, the Exchange may also agree in writing with the buyer or broker that the Exchange will pay the tax for all similar transactions on or before the due date for that quarter. For all such transactions completed during the quarter, the exchange would be obliged to submit a quarterly statement (in Form No. 26QF) on or before the deadline outlined in the Income-tax Rules, 1962 for all such transactions made during the quarter. The exchange’s income tax return would also need to be supplied and would need to detail all of these transactions The exchange’s income tax return would also need to be supplied and would need to detail all of these transactions. The buyer or his broker would not be considered an assessee in default under section 201 of the Act for these transactions if these requirements are met.

As a result of this circular,

1. The word “exchange” refers to any individual who runs a platform or application for the transfer of VDAs, matches buy and sell transactions, and then carries out such trades on that application or platform.
2. Any individual who manages a platform or application for the transfer of VDAs and maintains a brokerage account or accounts with an exchange for the execution of such trades is referred to as a “broker.”

Q2. Regarding transactions where the compensation for the transfer of VDA is not in kind, question no. 1 was raised. How will this work if it is given in return for another VDA or in-kind?

Ans. As stated in the addendum to sub-section (1) of section 194S of the Act, there may be instances when the consideration is in kind, in exchange for another VDA, or partially in kind and cash is inadequate to pay the TDS liability. In such cases, the person paying the consideration must make sure that any taxes that need to be deducted have been paid in connection with the consideration before releasing it.

After the seller shows confirmation that the tax has been paid in the aforementioned scenario, the buyer will release the compensation in kind (e.g., Challan details etc.). Both parties are the buyer and the seller in a situation where VDA “A” and VDA “B” are being traded. The first is a buyer for “A” and a seller for “B,” while the second is a buyer for “B” and a seller for “A.” In order for VDAs to be exchanged, both parties must pay taxes related to the transfer of VDAs and provide each other with proof of payment. The TDS statement would then need to include this information along with the challan number. This year, requirements for reporting such transactions were added to Form No. 26Q. Form No. 26QE has been introduced for certain individuals.

However, there are practical problems with executing this clause if the transaction is made through an exchange. It is made clear that, in this case, the exchange may instead deduct tax in order to address this practical issue and ease the difficulty. Based on a signed contract with the buyers or sellers, the exchange may use this alternate approach.

When such a different mechanism is used?

1. The exchange would have to pay the government after deducting taxes from both legs of the transactions. For the previously stated reasons, it will be necessary to declare it as tax deducted on both legs of the transaction on Form 26Q.
2. Both the buyer and the seller would not be obliged to individually follow the proviso to sub-section (1) of section 194S of the Act’s instructions.

The tax amount deducted by the exchange under section 194S of the Act on such transactions may also be in kind and require conversion into cash before it may be deposited with the government.

1. The exchange will deduct TDS from the pair being exchanged at the moment of the transaction. For instance, in the event of a transaction from Monero to Deso, the exchange will withhold 1% of Monero and 1% of Deso as tax in accordance with section 194S of the Act and pay the remaining 1% to the customer. The exchange should keep a record of all transactions showing the deduction of one percent of consideration for each VDA-to-VDA trade.
2. The exchanges must promptly execute a market order to exchange this tax deducted in kind (1% Monero/1% Deso in the example above) into one of the major VDAs (BT, ETH, USDT, or USDC), which may be quickly translated into INR. By taking this action, you will make sure that the tax that was deducted under Section 194S of the Act in the form of non-primary VDAs like Deso/Monero is converted into the equivalent of primary VDAs that are available on the INR market. To guarantee that the exchange converts the VDAs it has withheld as soon as possible, order timing records must be kept. This step would not be taken if taxes were withheld on main VDAs.
3. For the day, the total amount of tax deducted in accordance with Section 194S of the Act in the form of primary VDAs or converted into primary VDAs under Step (ii) shall be tallied. The time period will be from 0:00 to 23:59 hours. The trail from VDA orders to transactions performed throughout the day will show how much VDA the exchange has accumulated.
4. The total principal VDA amount at 00.00 hours will be translated to INR using the market rate in effect at that time. The exchanges are obliged to post-market orders for the tax withheld “or converted under step (ii)” in the form of primary VDAs for conversion at 00:00 hours in order to bring uniformity and prevent discretion. Based on the open buy orders in the market, these sell market orders will be carried out. Every matched deal will have price and quantity information that the exchange will keep up to date and make available for verification. The initial buy order based on the active buy order book of the relevant exchange at the moment of conversion must have occurred in order for the conversion into INR to be verifiable from the system code. It is customary to forbid the appropriate exchange from liquidating the VDA from purchasing these VDAs.
5. A contract note containing the amount of tax withheld in kind under Section 194S as well as the amount of INR realized from that tax will be emailed to the customer.
6. According to the timeline and method outlined in the Income-tax Rules 1962, the tax withheld in kind under section 194S of the Act and converted into Indian rupees by following the aforementioned procedure must be deposited in the Government Account.

It is made clear that there will not be any extra TDS if the in-kind tax is transferred from a VDA to INR or from one VDA to another, then back to INR.

Q3. Whether the provisions of Section 194Q of the Act also apply to the transfer of VDA.

Ans. It is made clear that after tax is deducted under section 194S of the Act, tax no longer needs to be deducted under section 194Q of the Act, regardless of whether VDA is considered to be a good or not.

Q4. Whether the consideration for the transfer of VDA to be on a “net basis” after the elimination of these things or on a gross basis after incorporating GST and commission?

Ans. It is made clear that the tax that must be withheld under section 194S of the Act shall be applied to the “net” consideration after deducting GST and any fees assessed by the deductor for providing services.

Q5. Tax may be deducted twice in transactions where payment is made through payment channels. To demonstrate that a person “XYZ” must pay the seller in order to transfer VDA. He uses the “ABC” digital portal to pay one lakh rupees. Given these facts, “XYZ” and “ABC” may both be liable for tax deductions under section 194S of the Act. Is it necessary for both to deduct taxes?

Ans. To solve this issue, it is stipulated that in the example above, if the tax has already been deducted by the person (‘XYZ’) obliged to make a deduction under section 194S of the Act, the payment gateway will not be required to deduct tax under section 194S of the Act on a transaction. Therefore, in the example given above, “ABC” will not be compelled to deduct tax under section 194S of the Act on the same transaction if “XYZ” has done so for one lakh rupees. In order to ensure appropriate execution, “ABC” may request an assurance from “XYZ” about the tax deduction.

Q6. Beginning on July 1, 2022, Section 194S will be in force. Only when the value or total value of the payment for the transfer of VDA during the financial year exceeds 50,000 rupees when the consideration is paid by a defined person, and 20,000 rupees in all other situations, is there a tax deduction obligation under Section 194S of the Act. How this Rs. 50,000 (or Rs. 10,000) cap is to be calculated is unclear.

Ans. It is made clear that

1. Since the barrier of 50,000 rupees (or 10,000 rupees) relates to the financial year, counting the consideration for a transfer of VDA that triggers a deduction under section 194S of the Act must begin on April 1, 2022. Therefore, if the value or aggregate value of the consideration for transfer of VDA payable by a person exceeds 50,000 rupees (or ten thousand rupees) during the financial year 2022–23, the provisions of Section 194S of the Act shall apply to any sum representing consideration for transfer of VDA that is credited or paid on or after July 1, 2022. (Including the period up to June 30th, 2022).
2. Since the provisions of section 194S of the Act take effect at the time that any sum representing consideration for the transfer of VDA is credited or paid (whichever comes first), any sum that has been credited or paid prior to July 1, 2022, will not be subject to tax deduction under section 194S of the Act.